JPMorgan Chase Q1 2022 Earnings Report Recap

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JPMorgan Chase (JPM) Financial Results: Analysis

JPMorgan Chase & Co. (JPM) reported mixed results in its Q1 FY 2022 earnings report. Earnings per share (EPS) missed analyst expectations, down 41.6% year over year (YOY). Earnings were adversely affected by a $902 million net reserve build due to an increase in the probability of higher loan losses. Banks set aside some of their earnings in a loan-loss reserve during times of economic weakness in order to act as a safety buffer in the case of loan defaults. The bank cited inflation and the war in Ukraine as primary reasons why the likelihood of downside risks had increased.

JPMorgan's quarterly revenue came in above forecasts but was down 4.8% compared to the year-ago quarter. The bank's net interest margin beat analyst expectations.

The bank's shares were down more than 3% in pre-market trading. Over the past year, JPMorgan's shares have provided a total return of -13.5%, well below the S&P 500's total return of 6.5%.

JPM Net Interest Margin

JPMorgan reported a net interest margin of 1.67%, up modestly from the 1.63% posted in the final quarter of FY 2021. This key metric measures the difference between the income banks generate from credit products like loans and mortgages compared with the interest they pay to depositors and other creditors. It is analogous to gross margin reported by non-financial companies, which is the difference between sales and cost of goods sold. Note that JPMorgan refers to net interest margin as "net yield on interest-earning assets" in its financial materials.

In extremely low interest rate environments, net interest margins get squeezed as banks lower rates charged to borrowers in order to remain competitive but are reluctant to push rates they pay to creditors below the lower zero bound. Net interest margins have been squeezed since the Federal Reserve lowered rates in 2020 to help deal with the economic crisis caused by the COVID-19 pandemic.

But rising inflation has prompted the Fed to act faster than originally expected in hiking interest rates. Last month, the Fed raised interest rates for the first time since 2018. Fed officials also laid out an aggressive rate hike schedule that could see interest rates rise significantly higher by the end of the year. Since then, the Fed has indicated that it may be even more aggressive with rate hikes.

While rate hikes would help to boost JPMorgan's net interest margin, many economists believe that the economy risks slipping back into recession caused by both the Fed rate hikes and global supply chain disruptions that are accelerating the pace of price increases. The risk of recession, they think, is definitely rising. A recession would hurt JPMorgan's lending activity and, if followed by lower interest rates, would compress its net interest margin again.

JPM Loan Growth

JPMorgan said that loan growth continued to be strong during the quarter, with firmwide loans up 5% and credit losses still at historical lows. The bank said that it was optimistic about the economy in the short run, citing healthy consumer and business balance sheets and robust levels of consumer spending. However, high inflation, issues with supply chains, and the war in Ukraine all pose significant risks over the longer term.

JPMorgan's next earnings report (for Q2 FY 2022) is expected to be released on July 14, 2022.